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spk08: fourth quarter and full year 2020 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone keypad. If at any time during the conference you need to reach an operator, please press star then zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to Katie Turner, Investor Relations. Please go ahead.
spk05: Good afternoon, and thank you for joining us on PetIQ's fourth quarter and full year 2020 earnings conference call. On today's call are Ford Christensen, Chairman and Chief Executive Officer, Susan Schulzis, President, and John Newland, Chief Financial Officer. Before we begin, please remember that during the course of this call, management may make forward-looking statements within the meaning of the federal securities laws. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could differ materially from actual events or those described in these forward-looking statements. Please refer to the company's annual report on Form 10-K and other reports filed from time to time with the Securities and Exchange Commission and the company's press release issued today for a detailed discussion of the risk that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please note on today's call, management will refer to certain non-GAAP financial measures, including adjusted gross profit, adjusted SG&A, adjusted net income, and adjusted EBITDA, among others. While the company believes these non-GAAP financial measures will provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's release for a reconciliation of non-GAAP financial measures and the most comparable measures prepared in accordance with GAAP. In addition, PetIQ has posted a supplemental presentation on its website for reference. I'd now like to turn the call over to Cord Christensen.
spk12: Thank you, Katie, and good afternoon, everyone. We appreciate you joining us today to discuss our fourth quarter and full year 2020 financial results. Today, I will begin with an overview of our strategic business and financial highlights, then Susan will provide greater detail on our services segment, and John will discuss and review our financial results. Finally, Susan, John, and I will be available to answer your questions. In 2020, the diversification of our business model and the complementary nature of how we connect with pet parents across our products and services segment has never been more evident. We generated record fourth quarter and full year net sales of $164.2 million and $780.1 million, respectively, and full year consolidated adjusted gross margin improved 130 basis points to 19.6%, and adjusted EBITDA of $67.8 million increased nearly 12%. This is impressive considering we operated much of the year with our wellness centers and community clinics temporarily closed due to COVID-19. And while we started reopening a small number of our locations in May, we still had certain regions, for example, in California where our clinics and wellness centers were not reopened until early in the fourth quarter based on local and state regulations and restrictions. We continue to operate across our entire organization with our number one priority being the safety and health of our employees. Our team has done a tremendous job to execute on our strategic objectives. Their agility and collaboration have helped us serve our retail and e-commerce partners. Together, we've experienced changing consumer purchasing habits that have meant we needed to be flexible to ensure we are serving pet parents and their pets where and when they needed to fulfill their pet health and wellness needs. The financial strength that our product segment provides to our broader business is an important component of the resilient nature of FedIQ. The product segment fueled our financial results in the fourth quarter and for the year. This helped to reduce some of the financial impact from our services segment. As we discussed on previous calls this year, in the middle of the year during Q2 and Q3 in particular, we experienced fluctuations in our business related to COVID-19, resulting in episodic surges in demand for our products business. At times, this made our quarterly year-over-year comparisons less indicative than our year-to-date comparisons when measuring the strength and momentum of our underlying business trends. Importantly, what has not changed are our robust industry tailwinds, including the humanization of pets and continued significant growth in our categories as pet parents are taking better care of their pet's health and wellness needs. These tailwinds are demonstrated by our annual products segment net sales increase of 17.6% year-over-year to $725.7 million, and adjusted EBITDA margin increased 440 basis points from Q4 last year to 17.1%. Our products business outperformed our original expectations for the year despite any COVID-19 related volatility. Taking a closer look at our product segments for the fourth quarter, sales were led by our e-commerce business that was up over 42% versus Q4 last year. Our non-RX e-commerce business was up 39% year over year for Q4. Our manufactured e-commerce business was up 161% including Capstar or up 95% excluding Capstar. Our products team emphasis on winning at both retail and e-commerce is paying off. The product segment distributed and manufactured product sales mix continued to improve beyond the 75%, 25% historical sales mix for the quarter. And we expect to see further improvement in 2021. Q4 marked our first full quarter of cap start with results that continued to outperform our expectations. We have clear line of sight to conservatively achieve our stated greater than $20 million of incremental EBITDA contribution from Capstar in full year 2021. This will also drive additional product segment margin improvement in 2021. Based on our Q4 and full year 2020 results and key programs already planned for 2021, we have tremendous confidence in our future growth trajectory and business momentum. PetIQ participates in several of the largest and fastest-growing categories within the pet industry, such as flea and tick solutions and health and wellness. As these categories have evolved both in size and channel, we are purchasing market data to better reflect our understanding of the categories we compete in. This new e-commerce data comes from a broader Nielsen report and data from a partner of IRI known as 1010Data. For the 52 weeks ended December 26, 2020, these data sets show the flea and tick category growing 11% and now eclipsing a 1.5 billion market in the OTC product segments. PetIQ's flea and tick manufactured brands outpaced this category by growing 13% while picking up 40 basis points of share in 2020. These share gains were driven by the e-commerce channel where our brands grew 63% year-over-year Our performance in these fast-growing set of customers was fueled by the Capstar brand, which was up 73%, along with PetArmor Plus, which grew 41%. PetIQ continues to lead the fastest-growing form within the flea and tick category of oral treatments. In 2020, this segment grew 24%, with PetIQ's portfolio growing 26%, and commanding the largest share of any oral brand in the measured oral category. This segment is expected to maintain strong momentum as we head into and throughout 2021. For the 52 weeks ended December 26, 2020, based on the same data sets, the health and wellness categories grew 42% and now eclipsing an 800 million market in the OTC product segments. CutIQ brands grew nicely at 22%, Yet we trailed the category due to just beginning to build out our portfolio within the e-commerce segment where the category is growing 66%. We view this as a strong incremental opportunity as we move forward. In 2021, we plan to launch an advanced product line to better position us to compete within the e-commerce channel. These types of premium offerings are what have led e-commerce to become dominant across the market within health and wellness. We are excited to begin participating in this segment and to provide our loyal consumers an even better option to meet their needs of their pets. As a result, our ability to grow and work collaboratively with our retail and e-commerce partners, beginning late in Q4, we invested in production and distribution capacity. This investment is continuing into Q1 and supports our confidence in PetIQ's longstanding relationships with our distribution partners, which we expect to continue to grow significantly in 2021 and for many years to come. Shifting to our services organization, our team reopened 100% of our clinics and wellness centers in Q4 in line with our stated objective. We finished 2020 with 126 wellness centers and operations, including 19 Wellness Center openings in Q4. Although our openings continue to demonstrate that we have returned to pet counts and average ticket per pet in line with our numbers pre-COVID-19 and ahead of the prior year period, we are continuing to experience COVID-19 headwinds caused by having to close 12% to 16% of clinics in operation due to employee absenteeism. This is caused by employees calling in with COVID-19 related symptoms and illnesses across our national services network. While we hope this level of absenteeism will lessen as we move forward, we are pleased to report that the clinics that are operating are delivering the individual profit contribution we would expect from those operations. The improvement in our services segment is most evident when taking a look at our results from Q3 to Q4, Services segment net revenue increased 60% from Q3, and on a year over year basis, our net revenue for Q4 was down 1.5% to 19.2 million, but almost back to break even. This is significantly better than the deficits we saw in Q2 and Q3. Our management team estimates that the fourth quarter impact to the services segment for those closures was approximately 5.6 million of lost revenue, and approximately 680,000 of adjusted EBITDA. Total service segment revenue for the quarter would have been approximately 24.8 million and adjusted EBITDA of 1.2 million if the services segment remained open and achieved its budget. We are pleased with the improvement in our services segment results for Q4 and to start 2021. We are expanding our telehealth platform and the resources needed to fuel our growth in 2021 and beyond. Our recruiting of new veterinarians and vet tech is progressing in line with our growth objectives. We believe PetIQ's mission of delivering smarter options for pet parents to help enrich their pets' lives through convenience and affordable access to veterinarian products and services has never been stronger. From a balance sheet and cash perspective, we continue to have ample liquidity and financial flexibility with our cash on hand, cash generation, and existing availability under our revolving credit facilities to support our future growth. And although we have suspended formal guidance due to uncertainty from potential COVID-19 related impacts to our business, we do want everyone to understand that as I stated on our Q3 call, we continue to maintain an internal budget of approximately $950 million in net sales and over $100 million in adjusted EBITDA. with the only significant variable to this plan being absenteeism affecting our services segment results. We have great visibility to another year of significant margin expansion and adjusted EBITDA margin expansion, demonstrating accelerating profit leverage at PetIQ. We will continue to monitor this as the year progresses, and as we reach a steadier state with lower or minimal rates of absenteeism, we will then be in better position to provide formal annual guidance. Before I turn the call over to Susan, I would like to welcome Cheryl Laughlin and Kim Lefkoe to PetIQ, both as independent directors on our board of directors. We are thrilled to have both of these talented executives joining our board, and we look forward to their significant contribution to our business. In summary, we believe PetIQ's differentiated position in the animal health industry will continue to fuel our long-term growth Our vertically integrated product manufacturing and distribution platform and national footprint of convenient and accessible veterinarian services, prescriptions, and OTC medications at a value are resonating with pet parents. We are fortunate to be in an industry that continues to experience rising pet adoption, increases in dollars spent for pets, and an emphasis on affordable, convenient pet healthcare. We believe PetIQ remains well positioned to capture a disproportionate amount of the industry growth as we move forward. With that overview, I would like to now turn the call over to Susan.
spk06: Thank you, Cord. The fourth quarter marked a significant turning point for the services segment as we continued to navigate operating in the ongoing COVID-19 environment. In line with our stated objectives, we reopened 100% of our community clinics and wellness centers during the quarter, and we celebrated 19 new wellness center openings. Of these openings, 58% were greenfield clinics and 42% were community clinic conversions. This brings us to a total of 126 wellness centers in operation to end 2020. Our 37 field offices remained open and fully operational and continued to ramp throughout the quarter in order to put us in line with prior year rates to start 2021. We believe we are well positioned for future growth, demonstrated by a strong sequential improvement in our financial results as compared to the third quarter of 2020. Services segment net revenues increased 60% from third quarter of 2020 and adjusted EBITDA improved by 129%. We also saw tremendous growth in all of our KPIs versus the prior period. The number of clinics we ran increased by 74% and the number of pets we saw increased by 78%. This is quite an accomplishment for our organization when you consider the external transitory headwinds we experienced during the year from COVID-19. Throughout this time, we've also continued to pay close attention to the veterinary services industry and benchmark ourselves versus the veterinary services market. We are incredibly pleased to report that although we temporarily closed our clinics anywhere from three to nine months in 2020, our pet count and our clinic revenue in Q4 quickly caught back up to the industry growth percentages versus prior year. These results continued into January where we outperformed the veterinary services industry in both pet count growth and clinic revenue versus prior year. Our team also continued to connect with more pet parents and their pets virtually via our telehealth platform. I'm proud to say today that PetIQ offers healthcare services in all 41 states that we operate, enabling us to have a veterinary professional available to our pet parents 24-7. The calls haven't slowed, even in the winter months, as many pet parents continue to stay at home or work from home and look for remote ways to care for their pets. Our segment net revenue of $19.2 million was just $200,000 less than Q4 last year, while adjusted EBITDA was down $1.4 million versus the prior year period. This reflects the slightly lower sales and the ongoing impact from COVID-19 related to absenteeism, which Cord mentioned, along with the costs associated with opening 19 new wellness centers. I'd like to thank our entire team for their unwavering dedication and hard work. Closing our clinics and reopening with completely new protocols and delivering these types of results is a true testament to the team. Their commitment and focus on furthering our mission of delivering a smarter way for pet parents to help their pets live their best lives through convenient access to affordable products and services has fueled the improvement in our results as our clinics and wellness centers reopened. In addition, We've said throughout the pandemic that our affordable positioning is in the right place at the right time. During 2020, in the wake of COVID-19, packaged facts data shows that 42% of dog owners and 43% of cat owners are paying closer attention to their pets' health and wellness. And importantly, 32% of dog and cat owners who consider their pets part of the family are concerned about the affordability of routine healthcare for their pets. As I mentioned last quarter, the pandemic has resulted in the strengthening of our relationships and long-term planning with existing and new retail partners. I believe we are in a stronger position than ever before to connect with more pet parents and their pets. We continue to expect our total Wellness Center build-out for 2021 will be in the range of 130 to 170 new Wellness Centers. Looking at the year in total, We expect our new unit growth to be evenly weighted between the first half and the second half of the year. And, as previously reported, 60% of our new wellness centers will be conversion clinics and 40% will be greenfield clinics. We're continuously recruiting veterinary talent to support our growth objectives and to position us to become a long-term sustainable player in the industry. Through our growing recruitment team and the medical affairs organization, we've continued to enhance and build our veterinary recruiting efforts across the country to support our growth for 2021 and well into the future. In Q4, and still today, we've continued to maintain our curbside service and our virtual line management process in order to meet pet parents' needs and to help us best manage lines to ensure efficient social distancing practices. Our safety protocols were designed with our retail partners to help keep all people protected and safe. The experience of this past year have taught our team to be resilient in the face of adversity. Our ongoing challenge continues to be the management of COVID related symptoms and or illness with our teams. Even with our required protocols and procedures in place, week to week, approximately 12 to 16% of our community clinics and wellness centers are temporarily closed due to employees with COVID-19 symptoms or infection. In addition, the inclement weather across the nation in February has thrown an additional challenge our way. But we know, like all consumer-facing businesses, we are not alone and both of these challenges are transitory. Because of our strong return to business in Q4 and our January results, we remain optimistic. Absenteeism will improve. and warmer weather will bring pet parents out of their homes. But as you can imagine, all of this makes forecasting results much more difficult in the near term. Another sign of ongoing improvement in our segment results is the solid improvement we are seeing in our KPIs versus prior year, when we and our pet parents weren't in the midst of a pandemic. I'm pleased to report that we are experiencing solid increases in pets per clinic and dollars per pet. In fact, Our results for each of these metrics have quickly come back in line or are exceeding prior year. It's important to highlight that these Q4 achievements in both volume and revenue were achieved with absenteeism and with the additional safety protocols in place. These are very encouraging metrics for our business and speak to the pent-up demand in the industry for veterinary services. A couple of additional items I would like to share. reinforcing the health of our services business and the state of mind of pet owners today. First, 50% of pet parents that utilized our services in Q4 were brand new to PetIQ. I've spent three of the last seven weeks in the field. Pet parents are coming to PetIQ for two reasons, affordability and convenience. Second, we relaunched our SmartCare wellness plans in January. To date, over 7% of our pet parents are purchasing them. SmartCare wellness plans provide pet parents a way to care for their pet throughout 2021 for a low monthly fee. Pet parents are eager to care for their pets, and PetIQ's wellness plans are affordable. In summary, we believe PetIQ's leadership position in the market, the strength of the relationships with our host retail partners, the team we've put in place, and the years of growth that lie ahead for our business position us well to capitalize on these and other opportunities within pet health and wellness. Our research and results continue to indicate that pet parents are seeking out solutions for affordable veterinary care at increasing rates. And Pet IQ's national network of convenient and affordable clinics are the perfect solution to meet their needs. With that, I'd like to pass the call over to John.
spk03: Thank you, Susan. We are pleased with our robust fourth quarter 2020 financial results. As Cord mentioned, both our net sales and adjusted EBITDA were higher than we expected to finish the quarter and the year. Our diversified business model has helped to fuel our consolidated results and positions us well to continue to benefit from the favorable pet health and wellness industry tailwinds. Our product segment generated solid results, and our services segment improved 60% from third quarter of this year to almost achieve break-even sales with the prior year quarter. This is quite impressive as we continue to experience absenteeism between 12% to 16%, creating closures week to week due to COVID-19 illness. We estimate the COVID-19-related impact from the temporary closure of our services segments to be approximately $5.6 million in lost net revenue and a reduction of $680,000 in adjusted EBITDA for the quarter. This assumes that our existing services locations had remained opened and performed at budget. On a year-to-date basis, this equates to $80.3 million in estimated lost net revenue and $16.3 million corresponding reduction in adjusted EBITDA. Based on these estimates, full-year service segment net revenue would have been $134.6 million, an adjusted EBITDA of $19.7 million. Fitting to our consolidated results, we generated record net sales increase of $10 million to $164.2 million. This was $20 million above our expectations for the quarter, driven by a return to normalized inventory levels at our customers and a return to prior sell-through growth rates. As a reminder, we had an unusual surge in product segment orders in Q2 related to COVID-19, which corrected itself during Q3. We are pleased with how well our products business performed during 2020 and our team's ability to have agility as they navigated through COVID-19 and the shifts in consumer shopping habits related to the pandemic. To start 2021, we expect to see continued growth in our manufactured higher margin product offerings. particularly as we benefit from the contribution of Capstar's portfolio of products, which we acquired on July 31, 2020, and continued growth in both our Parago Animal Health acquisition items and our existing health and wellness products. Fourth quarter, gross profit increased 39.7% to $28.6 million, and gross margin increased 415 basis points to 17.4%, even as the company experienced an estimated 264 basis point headwind from the temporary services segment closures due to COVID-19. Adjusted gross profit was $32.3 million, and adjusted gross margin was 20% for the fourth quarter of 2020, representing 280 basis points of margin expansion when costs associated with the temporary services segment closures are added back. Fourth quarter 2020 general and administrative expenses were $32.6 million compared to $23.6 million in the prior year period, an increase of $9.7 million. Adjusted general and administrative expenses were $26.9 million compared to $22.4 million in the prior year period, an increase of $4.5 million. This increase reflects $3 million of incremental amortization expense associated with the purchase of Capstar $1 million of normalized selling and marketing expenses related to Capstar brand, and $500,000 of professional fees associated with first-year Sarbanes-Oxley control testing. Excluding the increased amortization expense and the control testing fees previously mentioned, adjusted general and administrative expenses would have been $23.4 million, or 14.2% of net revenue displaying 26 basis points in continued G&A leverage. At the segment level, our product segment net sales for the quarter were 145.1 million, an increase of 7.5% year-over-year. For a full year, our product segment net sales were up 17.6% to 725.7 million. This was on top of a strong product segment net sales growth of 41.8% in 2019. An adjusted EBITDA increased approximately 45% to over 24.8 million, On a full year basis, product adjusted EBITDA increased 59% to $117.2 million. Our 2020 product segment results are ahead of expectations that we had for the business at the start of the year. Keep in mind, in the fourth quarter, we experienced a more normal margin contribution from the Capstar products now that we sold through the on-hand inventory that was at our historical distributed product margin profiles. Also, consistent with recent trends across the consumer industry, our e-commerce channel experienced disproportionately higher growth rates than other sales channels. In total, our manufacturer brands, including Pet Armor and Capstar, are experiencing some of the highest growth rates they have ever generated. These factors help fuel healthy operating leverage, which is a primary driver for the strong growth of the product segment adjusted EBITDA. Within our services segment, net revenues were $19.2 million compared to $19.4 million in the same period last year. As Court and Susan discussed, due to COVID-19-related temporary closures of the services location, the company generated lower revenue during the quarter than in the prior year period. However, we significantly closed the gap seen in Q2 and Q3 in our results, and on a year-over-year basis, we were nearly back to break-even, versus the significant deficit in Q2 and Q3. On a sequential basis, net revenue increased 60% for Q4 from Q3, a nice sign of stabilization in the services business as compared to the significant COVID-19 headwinds during the year. As a result, we reported adjusted EBITDA 510,000. And while down as expected from the 1.9 million in Q4 of last year, It is an improvement of 129% from a loss of $200,000 in the third quarter of 2020. Finally, on a consolidated basis, Q4 adjusted EBITDA was $13 million, an increase of 34%. If you factor in or add back our estimated loss of $680,000 of adjusted EBITDA from the services segment, then our Q4 adjusted EBITDA would have been approximately $13.7 million. And if you add back our estimated lost adjusted EBITDA of $16.3 million for the full year, our adjusted EBITDA would have been $84 million, an increase of 38% year over year. This assumes that our existing services locations had remained open and performed at budget. In this scenario, we are actually tracking better than our original guidance of $80 million of adjusted EBITDA for the full year that we provided in March of 2020. Turning to our balance sheet liquidity, as of December 31, 2020, our long-term debt balance, which is largely comprised of our revolving credit facility, term loan, and convertible debt issued in May of 2020, was $355.7 million. We had total liquidity of approximately $128 million. We also have an additional $15 million available via an accordion feature of the credit agreement for a total of $143 million of available liquidity. Working capital increased to $141.2 million for the year ended December 31, 2020 versus prior year, primarily due to the $123 million of net proceeds from a convertible note offering, partially offset by the purchase of Capstar. When combined with our available liquidity, the consistent positive contribution from the product segment puts PetIQ in a position to drive free cash flow and build cash in the quarters ahead, as well as opportunistically pay down our debts. From an outlook perspective, we're currently not providing Q1 or annual 2021 guidance due to the uncertainty surrounding the impact and duration of the COVID-19 pandemic on our services business. As we noted in today's earnings release, all of our company's community clinics and wellness centers have reopened as of December 31st, 2020. The services segment continues to experience an elevated level of absenteeism due to COVID-19 related illnesses And as a result, 12% to 16% of the services segment operations are temporarily closed week to week in an effort to keep employees and pet parents safe. Nonetheless, we are pleased with the results we have experienced in our wellness centers and community clinics in operation, giving us confidence in our plan to open 130 to 170 wellness centers in 2021, as Susan discussed in detail. We are pleased with the Capstar results in the nearly seven months since we acquired the business. Our team continues to have confidence about the incremental growth potential for Capstar as compared to when we completed the acquisition. And we believe the basis for our greater than 20 million of EBITDA contribution for Capstar for the fiscal year 2021 is very achievable. In closing, we're pleased with our results for the fourth quarter in the year. We generated record net sales and what continues to be a dynamic operating environment. Our team has executed well, and their contributions, along with the strength of our pet health and wellness product and service capabilities, will enable us to reach more pet parents and their pets with our convenient and affordable offerings. With that overview, Cord, Susan, and I are available for your questions. Operator?
spk07: Thank you. If you would like to register for a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw, please press the 1 followed by the 3. Our first question is from the line of David Westenberg with Guggenheim Securities. Please go ahead.
spk01: Hi. Thank you for taking the question, and congrats on a good quarter. So when I'm looking at the service center math, I think you noted 5.6 million is what you would have done. That's a 29% increase. Does that include the absenteeism of the 12% to 16% or is that just the opening here? And, I mean, if it's not, if you didn't include the absenteeism, I mean, does that imply 40% year-over-year growth?
spk12: Thanks for the question. The comments from the quarter, but the $5 million does take into account the 12 to 16% absenteeism. What it doesn't take into account in the margin profile is the increased expenses we're spending to run the base business during COVID. So the margins would have been significantly higher without those expenses on the $19 million or the 25 million and would have been in line with both 2018 and 2019 operating results. on the total sales from a margin and sales perspective. So the five does add back to lost sales from the 15%. The 29% is the more accurate growth rate for the quarter.
spk01: Perfect. All right. No, thank you very much. And then in terms of your long-term view with Capstar, I mean, it sounds like you're integrating this into the portfolio very well. It wasn't necessarily core to Elanco. I know you have a lot of the channels to use and those kind of levers to pull. Now, longer term, let's say that product in 2022, what do you think the natural growth rate of that product is? And would it have to have marketing spend behind it once you fully put it on your channels?
spk12: Great question, Dave. I think first I'll kind of take it in a reverse order. The good news is that the base P&L that we acquired from Alonco included $6 to $8 million of marketing spend against the brand. And we think that that money will continue to be invested against the brand, but obviously we understand how to spend it. We think significantly better in the right channels that will allow us to properly support the brand going forward. We saw a very significant year-over-year growth in Q4 on the brand in certain channels and very nice growth, better than we expected overall. But if you remember, flea and thick is seasonal. Fourth quarter is the lowest quarter of the year from a seasonality perspective. We've started the year with a similar trend in Q1 where we're starting to get into the season. We're anxious to see how Q2 goes, but there's no doubt the margin profile of this product line, the early indications of the growth that's there that We are being conservative right now with our estimates, and if we continue to see these kind of results, we'll be able to give you an update of what the actual long-term growth trajectory is. But right now, we think it's in line with our overall belief of how the company can grow, and with that margin profile, it's going to be very accretive to the company.
spk01: Great. Now, thank you very much. And then just back to the clinics, you know, you had a lot of reopenings in the quarter. You performed well. Can you just maybe give us a base in terms of a snapshot of what they look like when you did reopen them? And what I mean by that is when you reopened them, the newer ones, what I mean, did they perform, like say it's a six-month-old clinic, did they perform like a six-month-old clinic, or did you have to kind of reopen them and redo the marketing as if maybe they're a three-month clinic? Does that question make sense?
spk12: Yeah, I think it does. Susan, do you want to take it? I think the topics you and I have talked about a lot lately, so I think you'll do great at it.
spk06: Yeah, thank you. And thank you for the question, David. It's a good question. I think that there were – I want to just back up for one moment just to talk about the headwinds that we were experiencing when you look at those fourth quarter results. If you remember, at the end of the day, we were, you know, obviously had to put completely different protocols in place, number one, Number two, we had the PPE in place. Number three, we didn't spend anything in marketing in Q4. And so the numbers that you're seeing right now where we were basically back to where we were in prior year quarter, that's without marketing spend. So the demand is there. And in the clinics that you're talking about, the clinics that we opened in fourth quarter, they opened very busy. And I think, again, it comes back to the fact that we're in the right place at the right time. And pet parents, that pent-up demand that's out there, they've been waiting a year to come into clinics, and we are definitely seeing that. I think that the other piece, too, is that if 50% of the people that are coming to us right now are brand new to us, that means that, number one, they're not getting into their full-service veterinarians right now, or, number two, they're looking to us for affordability.
spk01: Thank you very much. I'll jump back in queue.
spk07: Our next question from the line of Joe Altobello with Raymond James. Please go ahead.
spk10: Thanks. Hey, guys. Good afternoon. So first question on the Wellness Center closures due to absenteeism. The number that you quoted for us tonight, the 12% to 16%, that was basically the same number that you gave us three months ago. So I'm curious, here in early 21, January, February, with case numbers coming down overall, is that number getting better at all in Q1?
spk12: Susan, you want to go ahead?
spk06: Yes, no, I'd be happy to. Thank you for the question. Interestingly enough, the absenteeism rate has remained in the range of 12% to 16%. It has not changed. It fluctuates from week to week, so there may be a week where we're at 12% and then there's a week that we're at 16%. We believe that we'll be more able to accurately forecast absenteeism once we start to see that trend dropping very consistently, and we haven't seen that trend drop very consistently. To give you just a touch of flavor, I think, around what causes absenteeism, I think I'll give you just a couple of the top reasons. Number one is an individual that is working in our clinics that has COVID-like symptoms. Our number one rule at Pet IQ, whether you're in one of our facilities or in one of our clinics, is that you do not come to work with symptoms. You do not come to work if you're sick. Number two, if we have veterinarians that have a child or a family member that wakes up with COVID-like symptoms and they stay home, that's another big reason why we have absenteeism. And then third, if an individual feels fine and they come walking into our clinics, we temperature monitor every time people come walking into our doors. And if they have an elevated temperature but they still feel fine, we have to close that clinic down. So it is more than just... positive COVID case, it really is very linked to symptoms. And I think, again, just making sure that we continue to keep people safe. But that 12 to 16% right now is pretty consistent. I think as we continue to get the vaccine out and available around the country, we'll start to see those rates drop.
spk12: Got it. Joe, this is Corey real quick. I think the other thing I would mention to you is we've modeled out what we're seeing across the entire four quarters. And although we're showing it at these ranges for Q1 and most of Q2, we do show a pretty significant tapering off in Q3 and Q4. And I feel like we've been reasonably conservative in our assumptions for a full year. If this absenteeism rate is where we've assumed that we should have about a $15 million revenue impact, but no more than a $5 million EBITDA impact, um, very different than the $80 million and $16 million we had in 2020. And obviously, we work every day to bring that number down even faster and are hopeful that it's better than that. But we definitely have control of the variables that are affecting the sales and the margin. We know how the impact is felt financially. Our people are very aware how to do the right things to get the numbers to the right place. But again, we're going to put safety first and work at our best to get that safety first to also allow us to have our clinics running.
spk10: Got it. Okay, so if I'm interpreting it correctly, Corey, it sounds like from an EBITDA perspective, the contribution from services this year in 21 is going to be closer to the $20 million that you did in 19, obviously, than the $3 million you did in 20.
spk12: Correct.
spk10: Okay. I think that's about it for me. I'll handle everything else offline. Thanks.
spk12: Thanks, Joe.
spk07: Our next question from the line of John Anderson with William Blair. Please go ahead.
spk04: Good afternoon, everybody.
spk12: Good afternoon, John.
spk04: Okay. A few questions on the product side. So we're kind of targeting or budgeting, you know, when I think about we look at 2021, we're budgeting around 100 million of EBITDA. understand there's some risk around absenteeism a little bit that could move that up or down. But when we think about that $100 million in EBITDA, how much is related to kind of your own brand business, the product brands that you own and manufacture? Because I think it may be larger than we and maybe investors perceive And obviously, a branded business has more equity with retailers and consumers. So I just want to understand order of magnitude there and make sure that's fully appreciated by the market. Thanks.
spk12: Thanks for the question, John. Really appreciate the question. You'll find in the supplemental PowerPoint that we post on our website, a deck that has a slide number six in the deck that goes through some of the strengths of the business. And I do think people have missed some of the strength of what's happened in our product business. We've literally maintained... almost a 40% CAGR on that business since we went public in 2017 to grow sales from 267 million to 725 million this past year. And on track for a growth rate to see another significant increase into 2021. And we've seen our even out margins for that division go up 460 basis points at the same time to go from 30 million in 2017 to 117 million in 2020 with a very significant increase again in 2021 being projected. For the $100 million of EBITDA we have projected for this year, our own brands will contribute a little over 26%, 27% of the sales in our product division to be greater than $225 million of the sales, but will contribute 70% of our EBITDA margin for the year, almost $70 million. And so it's a significant contribution to the company's success. And when you see the growth rates that we're achieving in the right channels with our own brands, like our Capstar brand in fourth quarter was up almost 73% online, our overall business up 63% for our own brands online, Pet Armor Plus up 41%. We just think we're off to a great start with huge margin expansion in this category for the business. But more importantly, we have line of sight to another significant increase in margin expansion in 2021. that's going to drive our ability to go from 67 million of adjusted EBITDA this year to over 100 million in 2021. So I really appreciate the question. Hopefully that is a clear enough answer.
spk04: Yeah, that's extremely helpful. It leads directly into the next question, which is if you can tell us a little bit more about what you're doing within the own brand portfolio. I understand Capstar, you've kind of addressed that in a prior question. But tell us a little bit about, you know, the rest of the own brand portfolio and where it's growing, why it's growing, new business opportunities, and retail sets for 2021. Yeah, leave it at that.
spk12: Yeah, great. Well, I think, John, first and foremost, we've obviously had a very strong foothold and have – more registrations than anybody in the flea and fit category across both topical and our oral category now with the Capstar brand and view that as a category that we're going to continue to retain our dominant position in and continue to see growth as we continue to develop new items and continue to market and push. But we saw, you know, renewal of all of our items in our core business and the contribution and we're seeing the growth rate in those items in the category that we have just the highest gross margin profile for the company. So we're very excited about what we're seeing in the clean and fit category. The other category that we play a significant role in is the health and wellness category. And that's the category where we put a significant amount of development work on and we'll be launching some significant new lines this year in 2021 that we view will position us to quickly grow into that number one spot for the health and wellness space. as well. That category just a couple years ago was only a $300 million category. It's now an $800 million category with almost all of the growth coming online.
spk04: Okay. And thank you. That's helpful. Last one for me is... Sorry, Cord. You there?
spk12: I'm here. Can you hear me, John?
spk04: Yeah, I can hear you. So... It generally comes up. We all get asked about it a lot. On the distribution side, I know it's not anywhere near a significant portion of your underlying profit base, but is there any kind of an update with respect to distribution partner relationships? Thank you.
spk12: Yeah. I think I've told you in the last call that We have roughly 80% of our distribution volume and profitability coming through our BI partnerships with the other 20% coming from our Zoetis relationship. The BI agreement, we have aligned in all terms and agreed in all terms. The legal departments are just finishing the documentation and we expect to have the amendment signed shortly and view that that relationship's in a very stable place to be a significant contributor for many years with the agreement we have in place. The Zoetis agreement, we believe, is still something that will get addressed in second or third quarter, but is not at the top of the priority list yet at Zoetis at this time. But, again, we feel great where we are with what we've accomplished with BI and that we're in great shape there and don't see any risk to that business.
spk04: That sounds – thanks. That's good news, and congrats on the quarter. Thanks, John.
spk07: Our next question from the line of Bill Chappelle with the Truist Securities. Please go ahead.
spk02: Thanks. Good afternoon. First, just on absenteeism, just trying to understand, like, with the understanding it's not coming down, I mean, how much is that in play in terms of both your wellness center rollout and even growing the clinics this year? I mean, does that cap? Could you do more if the absenteeism went lower? Could you possibly do less than you expect because absenteeism persists, you know, for the next several months? Just any thoughts around that?
spk12: We really, Bill, have separated the issue between our building schedule and the absentee issue from the company standpoint. We have set the schedule back in place that we originally established, and we've let everyone know we're going to open 130 to 170 locations. We have a strong belief that the absentee issue will subside and go away this year. And with the development of these centers taking 12 to 18 months to mature, we want to get them open, start to get the people in place and trained, get the communities we serve aware that we're there, and start building them. So we're not slowing down because of absenteeism. we'll be letting people know how it affects it. But again, with a fairly even development schedule across the year, we believe most of them will be getting open when the absenteeism will be coming down. So there right now, the board and us as a management team, we've aligned and agreed on a schedule to state to the 130 to 170 locations for 2021.
spk02: Yeah, I was just kind of wondering, I mean, if you have a conversion where there's 16% absenteeism and then you're trying to go from three days a week to five days a week, it would seem like there would be some complications there.
spk12: Yeah, not really. I mean, the issue is we're seeing the 15% or 12% absenteeism across the broader base. And there's a lot of days we're able to open and keep those clinics open and running. And right now it's on a run rating with that in place where we're profitable across the total service organization, which means We think it's the right thing to do to stand up to locations and get them started. As far as building more than what we projected, remember there's other barriers to growth, which is the rate at which we can hire veterinarians and train and deploy them. And we do feel like we have the right schedule in total for our development schedule at 130 to 170 for this year.
spk02: Okay. And then turning to kind of your discussion about the more premium product for the online channel, can you just give us, You said you built up manufacturing distribution in the fourth quarter, so that implies that we'll see these products fairly soon. Does that affect your existing relationships with retailers? Do you expect a meaningful impact here? Do you have a brand name that we should be looking for, anything like that?
spk12: Well, I think, Bill, if you were to go look at, you know, the Amazons and Chewy's of the world where most health and wellness brands have seen their most of their success or direct-to-consumer sales, There's a few brands that have done a really good job at very high price points with premium ingredients and premium packaging, and we have increased our ability to produce a significantly higher rate of cold-forming products, and we've gone through with our formulation teams and new hires to build some very significant items that we'll be launching. You'll see them start to launch the first of Q3, the premium line. There is a couple product items we've launched actually this month with Amazon in that space that are more in line with our historical products, but this is a category that we believe there's a significant amount of volume available to us. We do not believe it impacts our other retailers because we make all of our items available to all of our retail partners, and they'll decide if the shelf space is available, but at least online, we know we can get all of the items available, and it is where almost all of the new growth in the category has been achieved. So, We're excited to get our sites focused on this high-growth category, and we're excited to participate in having our health and wellness department inside our product division close the gap in volume and profit contribution, similar to our flea and tick category.
spk02: Got it. Thanks so much.
spk12: Thanks, Bill.
spk07: Our next question, from the line of Steph Wessink with Jefferies. Please go ahead.
spk09: Thank you. Good afternoon, everyone. Most of our questions have been asked, but I have one, Susan, for you. You mentioned productivity enhancements in the service business. I think I caught what you said, both volume and revenue per site had improved. So I'm wondering if you can talk a little bit about what you're seeing in terms of receptivity among consumers, any tech enhancements you've made that consumers seem to be adopting, any upsell. Talk a little bit about volume and revenue per site improvement, if you could. Thank you. Yes, absolutely.
spk06: Thank you for the question. I think something important that we've started to do is we're really following a lot of the published veterinary service industry reports. One of them, in particular, vet success data we follow. It's powered by the AVMA and VetSource. And what's interesting is that if you look at the veterinary services industry in last quarter of last year in 2020, volume is relatively flat. So new pets are – pet count is actually not increasing, but revenue is. And revenue has been pretty – was pretty consistent last year, somewhere between 7 and 10 percent. In fourth quarter, we literally were at that same level of what the industry standards were, but we basically surpassed that starting in January. And I would say that we did a couple of things in January. We doubled, actually, what the industry was seeing in January from both a volume and a revenue standpoint. Number one, I think that technology aside, it was more of offering our wellness plans. And I think when you think about the consumer today and what they're looking for and what their needs are, they're looking for consistency when it comes to what they're spending on. And our wellness plans actually help them to be able to budget and to plan to spend on a monthly basis versus spending, you know, in quarterly or half-year increments. So we have had tremendous uptake. I think the industry average for wellness plans is less than 5%, and we have over 7% of our pet parents that are taking these wellness plans on because they want to take care of their pets, but they want to do so in a way that they can manage their budgets as well, too. So I think that that is very COVID-related, and I think it's going to continue to – to happen throughout this year. In regards to I think telehealth is another place where we're also seeing enhancements and increases as well too. Our calls continue to go up and you look outside and in most of the country it's under snow and it's cold, but pet parents as they're staying at home or as they're working from home, they're picking up the telephone and they want to talk to somebody about their pet. They're not necessarily going out and visiting a veterinary clinic, but they want to get that basic advice on the phone. and our 24-7 service has definitely helped us to keep in contact with our pet parents and especially keep in contact with them while we are closed, but we continue to do that when we are open. So I would say from a technology standpoint, people getting on their telephones, apps, as well, too, in regards to chat features, people are going online chatting just to get basic answers to health questions.
spk07: Great.
spk06: Thank you very much.
spk07: And next question is from the line of Brian Nagel with Oppenheimer. Please go ahead.
spk11: Good afternoon. Thanks for taking my question. So with regard to the plan to open 130 to 170 clinics in 2021, could you tell us a little bit about the progress thus far to date and also what would the geographic dispersion will be?
spk06: Yeah, hi, Brian. I'm happy to take the question. First of all, I want to reemphasize that we are very committed and comfortable with the 130 to 170 this year. I think I mentioned last quarter that we've confirmed all locations. So I think that what has happened in this past year, in particular with our retail partners, is really our ability to bond with them. partners in crime, I would call us, managing through this COVID environment. So our retail partners have committed, and we have our location selected for this year, without a doubt. Our cadence is going to be pretty much spread throughout the year. I see one of the things that we've been asked to do by our retail partners is to be flexible on timing of the build-out, but I'm talking about a month here and a month there. I'm not talking about six-month swings. in the timing. So we are working closely together to make sure that we're getting these open. And again, it'll be pretty much spread throughout the year.
spk11: Okay, excellent. Thank you. And one more, too, one final question. As you guys push more aggressively into e-commerce, how should we be thinking about margins as you move more into this channel?
spk12: Yeah, great question. We've been fortunate that with our categories and the margin profile of our categories, we have not seen diluted margins to be online like maybe some of the other categories. So you should see still, like I said earlier, in 2021, a fairly significant margin increase across the product division, very close in size to what you saw this year out of that division. Obviously, with all the growth coming there, it wouldn't happen if we didn't have fantastic margins in that category. So I think you'll find that the margin profile will be consistent with the total company's profile. And if anything, just accelerating as we're seeing our higher margin items growing at a faster rate.
spk11: As I break up, guys, you still there? Yeah, I'm still here. Thank you for the answer there.
spk07: And because we have no further questions at this time, I'll turn the call back to you.
spk12: Thank you, everybody, for joining us today. Obviously, we're very excited with our results coming out of fourth quarter and full year with the acceleration we saw to allow us to have results better than we had expected for the quarter, which then led to better results for the year. More importantly... We're extremely excited about the momentum we have going into 2021, where we'll see another year with significant increases in our sales and significant increases in our EBITDA margins, where the management team has estimated our internal budget to be over $950 million in revenue and $100 million in adjusted EBITDA. So we look forward to talking to you in just a couple months when we report first quarter and the results we have there. And thanks again for joining us today on our earnings call for fourth quarter and full year.
spk07: And that does conclude the conference call for today. We thank you all for your participation and kindly ask that you please disconnect your lines. Have a great day.
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